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Had some questions by PM in my other guide about when to buy and when to lease a car. So, here ya'll go!



1. You expect to drive the car for at least five years or more. Once you pay off your auto loan, you'll have transportation without writing regular monthly checks.

2. You think you might drive the car for more than 15,000 to 20,000 miles a year. High mileage can be expensive on a lease.

3. You want to save money in the long run, and you are looking only at your cash costs. In theory, you could lease your car and invest the difference between the low lease payments and the higher payments you'd owe on an auto loan. In that case, leasing would be cheaper. But if you don't invest the difference, then buying is cheaper.

4. You're in the market for a used car. Thanks to the popularity of leasing, dealers are flush with cream-puff cars that were driven for two years and then turned in. Look for one that's "manufacturer-certified" as being in top shape.


1.You want a more expensive car than you could otherwise afford. Monthly payments on leases are generally lower than on comparable auto loans. Also, leases don't require big down payments.

2. You want to drive a new car every two to three years and don't mind having permanent monthly payments.


This method basically tells you how much it will cost to just have a car for a set number of years with both leasing and buying.

I highly recommend Edmunds financial calculators to help you decide:

You can just plug in the numbers and hit calculate to get the bottom line.

First some money/tax/dealer definitions:

Allowable Mileage: This is the number of miles you are allowed to drive over the term of the lease. Often this is stated as the number of miles per year you can drive. Most leasing companies allow 12,000 miles a year. On a three-year lease, that means you can drive a total of 36,000 miles. If the allowable miles are exceeded, you typically must pay between 12 and 15 cents per mile.

Capitalized Cost: Often called the cap cost, this is basically the negotiated price of the car and all the options. This becomes one of several figures used in calculating a monthly lease payment.

Depreciation: This is the amount by which property (in this case, a vehicle) loses its value. In leasing, depreciation is the difference between the new car's cost and the value of the car at the end of the lease (plus tax, interest and various leasing fees).

Drive-off Fees: This is the amount of money you must pay to begin the lease. Typically, this includes various DMV and leasing fees plus a security deposit. Some people who want to reduce the amount of their monthly payments will also make a cap reduction payment. This is cash, paid up front, and it becomes part of the drive-off fees.

Early Termination: This means you want to get out of the lease contract before all your payments have been made. After 24 months of a three-year lease, for example, you might decide you no longer can afford the car, or you are sick of it. So you decide you want to terminate the lease. This is very costly since leasing companies require you to make all the remaining payments and pay a penalty. However, some new Internet companies have sprung up recently to help people sell their leases to someone who wants to step into a short-term lease at lower payments.

Excess Wear and Tear: Most lease contracts have a clause which states that the person leasing the car is responsible for the cost of "excess wear and tear" to the vehicle when it is returned. When cars are used, they will eventually show signs that someone has been in them. What is considered excessive? Check your contract for specifics. But keep in mind that it is important to have the car washed and detailed before you return it. This can go a long way to avoiding having your security deposit revoked or extra charges levied by the leasing company.

Gap Insurance: If your leased car is stolen or totaled in an accident, there might be a gap between what your insurance company will pay you for the loss and the amount you now must pay to the leasing company. If you take out gap insurance (it is included in some lease contracts), this will cover you for this loss. For more information, check out the section on gap insurance in our article, Little Known But Important Insurance Issues.

Lessee: This is the person who has leased the vehicle.

Lessor: The lessor is the party who is leasing the car to you. Even though the dealership is arranging the lease, the lessor is often a bank or the financial arm of a car manufacturer.

Money Factor: Also called a lease factor or even a lease fee, this is the interest rate you are being charged. It is expressed as a multiplier that can be used to calculate your monthly payments. For example, 7.2 percent interest, when expressed as a money factor, is .0033. To convert a money factor to an interest rate, multiply by 2,400. To convert an interest rate to a money factor, divide by 2,400. (Always use 2,400 regardless of the length of the loan.)

MSRP: This stands for Manufacturer's Suggested Retail Price. Many dealers will try to base their leases on MSRP or above. However, you can negotiate a lower price to base the lease on.

Payoff Amount: Sometimes called buyout amount, this is the amount of money you have to pay to own the car. The payoff amount might be different from the residual value because of a refunded security deposit.

Residual Value: This is the leasing company's prediction of what the car will be worth at the end of the lease. The residual value is also important because it affects your monthly payment. The higher the residual, the lower your monthly payments.

Sales Tax: A portion of every monthly lease payment is paid for sales tax. However, you pay tax only on the amount of the car's value you are using. In other words, rather than paying 8 percent sales tax on a $20,000 car, you pay 8 percent of the $8,000 the car declines in value as you drive it. People who hate paying taxes love this part of leasing.

Security Deposit: The security deposit is usually equal to one monthly payment. Multiple security deposits can sometimes be made to reduce the interest rate and, consequently, the monthly payment.

Subsidized or Subvented Lease: To make leases more attractive to consumers, manufacturers sometimes subsidize or subvent the leases. This means that they are either offering very low interest rates or they are inflating the residual value of the vehicle. Both tactics have the effect of lowering the monthly payment for the consumer.

TTL: Tax, Title, License charges. Vary by state.

Total Financed: The amount of money you are taking for a loan.

Term: This is the length of the lease agreement. Typical leasing lengths are 24, 36, 48 and 60 months. However, sometimes lease agreements are for 36, 38 or 40 months (to make the lease payments appear smaller). We recommend that consumers choose a 36-month lease term.
OK, Now that the words have been taken care of here is how to calculate everything.


Here is what you need to do, you need to figure out exactly how much buying the car will cost for the set amount of years you wish to own the car.

I have put a screen shot of how to do this below for buying and leasing:

If you need help with the calculations (IE how to make them) just google "loan calculation".

OK. There is a lot of math involved, but use the edmonds calculator to get all the information. Much easier to do this and just fill in the blanks.

The only thing that you will need to do is this:

If you have different down payments or trade in value, you need to bring this into the equation to find out how much the car will really cost in total. In the example i did not do this because the trade in and DP are the same.

Now, multiply your payments by how many months you are in for it to find how much the car is going to cost Find out how much the vehicle will be worth when you want to get rid of it (in this case it was $9,000).

OK. You know have everything you need. Now do some basic comparisons here.

In the example you see that the LEASE costs 12,837.12 to have a car for four years.
Found by multi 267.44 (monthly lease) * 48 (months of the lease).

Now look at how much it costs to pay for the car including the finance charges, 19,522.08 (or 20,079.00). In the example this is found by multi 406.71 (or 334.65) the monthly payments * 48 (or 60) months of the finance.

Now, subtract the estimated residual value (trade in value of the car) in 4 years. So it would be 19,522.08 - $9000.00 = $10,522.08. THIS IS THE TOTAL TO BUY A CAR AND TRADE IT IN FOR FOUR YEARS WITHOUT CONSIDERING TRADE IN TAX OR DOWN/PREVIOUS TRADE IN.

So we see the following for having a car for four years:

LEASE - $12,837.12
BUY - $10,522.08

This shows with simple subtraction that to buy the car and trade it in after four years would save you $2,315.04
Cisco [G]awd

Last edited by Rage2132; 07-11-2006 at 12:49 PM..
Old 07-11-2006, 12:13 PM Rage2132 is offline  
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Very Nice!
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Old 07-11-2006, 12:19 PM Striker169 is offline  
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Very nice man, thanks for the advice, maybe a sticky :-P?
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Old 07-11-2006, 12:39 PM L1n34r_3urn() is offline  
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very nice...i did the same thing in my marketing class in college well done
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Def needs to be a sticky, or at least a link in the consolidated threads thread
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If you find anything I should add or make clear, let me know.

I think the edits are done for now unless something is found or questions
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Old 07-11-2006, 01:40 PM Rage2132 is offline  
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Originally Posted by Cumblasted
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Old 07-11-2006, 02:05 PM chronage is offline  
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Quick update:

Finished up the lease process for a company car. The process went something like this:

1. Test drive the cars at a dealership you probabbly won't by from and decide

2. Now, cold call or email internet managers or fleet managers. For the leasing process these were the people who gave the best bottom line quotes.

3. Go to the dealership and begin the process of negotiation. First thing is to decide what is the final value of the car. DO THIS FIRST. people get tricked into the whole residual value (too purchase the car after lease) or monthly payments. Get the bottom line first then work on the rest.

4. After you come to an acceptable price, begin discussing the money factor and residual value. Make sure the RESIDUAL VALUE is average for the car or you will probabbly be screwed in the payments. Higher residual value means less for payments, but more if you wish to procure the car. Lower residual value means you are paying too much in monthly payments. Average is the way to go so you get the worth of the car for the time you have it.

5. Money factor discussion for the most part (or inflation/calculation of the cars value with a wide amount of factors such as devaluation and wear/tear and milage. Most dealerships have a set MF, but if you do some research you can get the factor at a better rate to even out the payments.

6. I cannot say this enough. BEFORE SIGNING THE LEASE READ IT CAREFULLY! Read it a couple of times so you can check for errors or deception. For instance dealerships will charge you a procurement fee of $500 for a car that is on their lot. Basically you are paying for shipping when there is no shipping involved. Also, check the deposit and all values to ensure they are correct.

7. Once everything is checked over, you are good to go. Enjoy your new car!
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Old 07-19-2006, 11:57 AM Rage2132 is offline  
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Ritalin Kid
You forgot one:

Buying Used With Cash

1. For people who plan on saving money for the long term.

2. The cost of the car should not exceed 1/4 of your annual take home income.

3. Cash gives you more haggle power. (Often referred to "Walk Away" power.)

4. Elimenates Risk associated with a car loan and car payments.

5. Cheaper to own & operate than a Lease or a New car.

6. You can sell it without any hassle when you are tired of driving it.

7. You can usually save enough to buy another nicer car within 1.5 - 2 Years which allows you to drive a bigger variety of car over the years.

Since the average depreciation on a used car is usually 60% of it's MSRP a good example would be that buying a $15,000 car you would lose $9000 after driving it for 4 years. Most people have 5-6 year car payments meaning that after you have paid a new car off with a 5 year loan with, say, a prime rate of 5% comes to a total cost of $12,750 ($3750 in interest + $9000 in depreciation) to drive a new car for those 5 years NOT factoring in regular maintenance expenses.

Since most people buy a new car because of the "warranty" you could essentially say that you paid $3187.50 per year for a bumper to bumper warranty. For this price you can usually replace the drivetrain in a 4 year old used car 3 times over. Essentially, the new car warranty offers a false sense of security when in relality you can buy a 4 year old used car and keep a car emeregency fund of about $1000-$3000 (depending upon the car) and warranty any used car yourself & ironically the 4 year old used car is just as reliable as it's brand new counterpart.

On a personal note, I've always been told that a car payment is the mantra of the middleclass because so many middleclass people are convinced it's the only way to buy a car. The irony is that most wealthy people buy their cars used while building their wealth and do not look to buy expensive toys until after they have accomplished their personal financial goals. This is why I tell most people not to purchase car that equal more than 1/4 of their total take home income. Anymore than 1/4 is too much invested in an asset that is loosing value at an incredible rate and you should always try your best to put money in things that increase in value while you are trying to build wealth. Someone making 1 million a year can afford to absorb the loss of depreciation on a $50,000 whereas someone making $75,000 a year cannot.

Bottom Line: Don't go out and bite off more than you can chew while you are trying to make a name for yourself by buying things you really can't afford while trying to impress people you really don't like.

Last edited by Ritalin Kid; 07-19-2006 at 01:26 PM..
Old 07-19-2006, 12:59 PM Ritalin Kid is offline  
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Added to consolidated threads and stickied (5 days)
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Old 07-19-2006, 01:23 PM OneWhoKnows is offline  
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Originally Posted by Ritalin Kid
You forgot one:

Buying Used With Cash

3. Cash gives you more haggle power. (Often referred to "Walk Away" power.)

This is not always true....

I worked for a Used car dealership for 3 years.
They would laugh at people (not literally at them) that said "I have cash" because it doesn't matter, they are going to get your money no matter how you give it to them.
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Old 07-22-2006, 10:33 AM Namtaru is offline  
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